Analyst Day provides positive Hycroft and exploration update We reiterate our BUY rating on Allied Nevada following the Analyst day which reinforced the company’s plans for the Hycroft accelerated heap leach and mill expansion and provided an update on 2012 exploration priorities.
Hycroft Update Management reiterated the initial capital cost estimate for the expansion project of $1.2 billion, with $400 million having been already committed ($39 million spent). Potential areas for cost overruns are largely related to installation costs: concrete, steel, piping and electrical work. While capital and mining costs could be subject to some inflationary pressure (especially the base case mining assumption of $1.05/ton), the NPV sensitivity to these parameters is less than the sensitivity to milling costs (where management believes they have been conservative) and much lower than the sensitivity to gold and silver prices and recoveries. We believe the company is well financed from the recently-completed high yield debt financing ($400 million @ 8.375%), current cash and expected operating cash flow that can more than fund the expansion program at Hycroft.
Metallurgy and discussion on Autoclave Recovery testwork has been extensive and the current plan estimates life-of-mine average recoveries of 67.4% for gold (ranging from 47.9% ROM to 76% oxide mill) and 72.9% for silver (ranging from 10.8% ROM to 85.8% sulphide mill). One key positive element to the metallurgy of the sulphide mineralization at Hycroft is that silver is non-refractory as it is contained in a readily leachable mineral called pyrargyrite. In fact, because all of the sulphide concentrate would be leached in advance of autoclave processing (2021 and beyond), approximately 95% of the life-of-mine recoverable and payable silver would be produced onsite (versus 64% for gold). The current Hycroft mill plan (and our valuation) assumes the gold recovery benefit of autoclave processing onsite. But, this assumes that only approximately one-third of the sulphide concentrate would be processed in an onsite autoclave, with the balance shipped for third-party processing either via autoclave or smelter. Management isn't entirely convinced that it will construct in 2019-2020 an onsite autoclave at a cost of $283 million (including contingency); however, the economics favour construction of an autoclave above $1,200/oz. The decision on an autoclave is not a bottleneck to the current mill permitting process. The company plans to file an EIS for the autoclave with approval by mid-2015, but would only need to apply for a key air quality permit at a much later date timed for construction start in 2019.
Permitting updates Allied Nevada has received the construction permit for the gyratory crusher in March which has permitted for earthworks and ground preparation to begin ahead of schedule. Other permitting initiatives include a reclamation permit for the mill (expected in January 2013, potentially sooner), a permit for the construction of a rail spur (expected mid-2013) and submitting of permitting for the pit lake in Q3/2013 (allows for mining below the water table). The current mill permit does not include the construction of an autoclave.